Understanding Earnings Surprises: What Are They?

“Unexpected earnings” is the term used in accounting to address the difference between a company’s actual earnings for a period and the earnings they were expected to generate. It is also sometimes referred to as an “earnings surprise.”

The “unexpected” aspect can be either positive – meaning the company generated more earnings than expected – or negative – which means the company earned less than they were expected to earn.

Standardized Unexpected Earnings (SUE)

One of the most common methods to determine unexpected earnings is a mathematical formula known as “standardized unexpected earnings” or SUE. “Surprise” earnings can often be useful when developing strategies for trading. However, in order to determine if such a strategy can be effective, the relationship between the performance of a company’s stock and its unexpected earnings must be explored. This is done through the SUE calculation. The SUE formula is given below:

Where:

• EPS(Q1) – the earnings per shareEarnings Per Share (EPS)Earnings per share (EPS) is a key metric used to determine the common shareholder's portion of the company’s profit. EPS measures each common share's profit reported for a given quarter
• fEPS(Q1) – the forecasted or anticipated earnings per share for a company during the same quarter
• SD(Q1) – the standard deviation of estimated earnings for the specified quarter

The SUE formula enables a trader or analyst to get an understanding of where the current pricing on a stock falls, whether it is within a single standard deviationStandard DeviationFrom a statistics standpoint, the standard deviation of a data set is a measure of the magnitude of deviations between values of the observations contained of the expected price or not.

(Forecasted earnings per share are determined by analysts through mathematical forecasting methods and financial modeling to express – based on historical data – what the company should reasonably be expected to earn during a given period.)

Importance of Unexpected Earnings

Unexpected earnings are an important component in the accounting/financial industry because of their potential significance for investors. The “surprise” aspect of the earnings means that the price of a stock can spike up or fall dramatically over the course of a single day.

Forecasting price/earnings can be tricky, which means that unexpected earnings may be the result of inaccurate analyst estimates. However, when unexpected earnings – positive or negative – are the direct result of the company’s actions, they may offer important insights to investors about the future trajectory of the company’s stock.

What are Expected Earnings?

Expected earnings, as the name suggests, are the earnings a company is anticipated to generate. The figure is determined by market analysts who study the company’s historical earnings. They also consider the state of the overall market and how it has been, and is currently, responding to the company.

Financial analysts make mathematical and financial modelsTypes of Financial ModelsThe most common types of financial models include: 3 statement model, DCF model, M&A model, LBO model, budget model. Discover the top 10 types of a company’s earnings from other accounting periods. They use the models to forecast what the company can reasonably expect to generate in earnings during the upcoming accounting period. Naturally, analysts do their best to avoid “unexpected earnings” reports.

Related Readings

Thank you for reading CFI’s explanation of Unexpected Earnings. CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)®Become a Certified Financial Modeling & Valuation Analyst (FMVA)®CFI's Financial Modeling and Valuation Analyst (FMVA)® certification will help you gain the confidence you need in your finance career. Enroll today! certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

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